Thursday, June 28, 2018

Why Don't We Eliminate The Charitable And Mortgage Interest Deductions?

I've read enough candidate tax plans to make me believe that we could use something a little different and out of the box.

Most, if not all of the Republican tax plans have called for at all costs maintaining the mortgage interest deduction and the deduction for charitable contributions. None of the Democrats have come out with a comprehensive plan except for arguably Lincoln Chafee who thinks the Internal Revenue Code is not so bad, but it needs an extra bracket and higher exemptions. Bernie Sanders has not come out with a formal plan, but his campaign sent me a summary with several fairly predictable items, but not the rates.

Being something of a contrarian, I decided that I would come up with a plan that leaves the Code pretty much alone like Chafee recommends, but bucks Bernie and the Republicans. The way I threaded that needle was by reflecting on the fact that the only two words that come out of Bernie's mouth more often than "Pope Francis" and "Koch Brothers" are "middle class". So my plan has three principles.

The first principle of my plan is that the current Internal Revenue Code isn't so bad. There is a bunch of stuff that I would cut out, but it turns out that any individual piece has somebody who loves it. Like the way the Knights of Columbus will jump on you if you threaten 501(c)(8). The second principle of the plan is why should I care about the middle class? Nobody seems to have a clear definition of who is in it and according to Bernie Sanders it has been disappearing for forty years, so how much of it can be left? The third principle is that I wanted to come up with something really provocative and out of the box.

I Only Want To Eliminate Two Things

The only two things I will eliminate are the charitable contribution and the mortgage interest deduction. The reason I picked them is because in most, if not all, of the Republican plans, those are the only two itemized deductions that are kept. Frankly if you blew those away, I think you would end up with a lot of non-itemizers, except in the high tax states, but let the chips fall where they may.

But That's Not All

The additional revenue will be used to send a check to every single man woman and child in the country. The check will arrive around December 15. I'm not going to say why I picked that particular date, but I think you can figure it out. My back of the envelope computation was $300, but I have been able to do better than that.

The Tax Foundation

I asked Scott Greenberg at the Tax Foundation to score my plan and we went back a forth a bit. Then I asked him to figure out the break-even check , which will be indexed for inflation. He told me it would be $480. Here is the bottom line.

By eliminating the mortgage interest and charitable deductions, you could raise enough revenue to provide a $480 refundable credit to every adult and child. T his proposal would be roughly revenue neutral on a static basis, although on a dynamic basis, it would lose $88 billion over 10 years, due to a smaller economy.

You know what. I think they might be wrong on the dynamic scoring. All those people getting checks a week before - you know - would have an awesome effect on retail spending. Ho! Ho! Ho!

Distributional Effects

This is where it is beautiful. Everybody below $50,000 gets a good bump in their after-tax adjusted gross income - 15% for those under $5,000. From there it starts costing but it never gets much over 3% (Worst is $250,000 to $500,000. I used to live in that neighborhood. They can handle it.) Here is the table that Scott sent me.

AGI

Static Distributional Effects - % change in after-tax AGI

Dynamic Distributional Effects - % change in after-tax AGI

$0 - $5,000

15.19%

14.81%

$5,000 - $10,000

7.26%

6.90%

$10,000 - $20,000

5.20%

4.84%

$20,000 - $30,000

3.49%

3.10%

$30,000 - $40,000

2.32%

1.93%

$40,000 - $50,000

1.48%

1.11%

$50,000 - $75,000

0.65%

0.29%

$75,000 - $100,000

-0.07%

-0.42%

$100,000 - $150,000

-1.25%

-1.58%

$150,000 - $200,000

-2.07%

-2.41%

$200,000 - $250,000

-2.61%

-2.94%

$250,000 - $500,000

-2.77%

-3.11%

$500,000 - $1,000,000

-2.49%

-2.84%

> $1,000,000

-2.03%

-2.42%

I was thinking of doing this as a satirical article where I talked about my own Presidential run. My covivant, who I enlisted as my exploratory committee told me that seeing as how I had no political experience am not a good speaker and was subpar in executive presence while a partner in a regional accounting firm, I probably would not do to well. She also wondered whether she would be First Lady since we are not, you know, married. That was really the only funny part and the more I'm looking at this proposal, which started as satire, the better I am liking it.

A common contribution is essential for the maintenance of the public forces and for the cost of administration. This should be equitably distributed among all the citizens in proportion to their means.

Declaration of the Rights of Man

Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.